In 2010, the government called its Great Rail Leap Forward a success: "China has achieved more in high-speed rail development in 5 years than the rest of the world combined in over 4 decades."

But the sector has suffered recently. First Liu was replaced by a less ambitious rail minister as part of a political shift away from rail. Second there was a major train crash in Wenzhou.

Jefferies, in a report out today, says things will only get worse as it becomes apparent that the Great Rail Leap Forward was fueled by an unsustainable rise in debt:

The boom has turned to a bust, and the issues facing rail are symbolic of the risks in China’s broad infrastructure spending: 1) It is a key source of rent seeking and grey income; 2) The fast build-out may have come at the risk of quality and safety; 3) Projects are far ahead of demand and have dubious cost-benefit rationales; 4) The lack of demand for the infrastructure and the cash flow mismatch have guaranteed the unsustainable rise of debt at MOR and local governments. If China is to get rich tomorrow, [Fixed Asset Investment] needs to slow today.

Jefferies's Julian Bu identifies some areas where the Great Leap Forward went wrong [our summary follows]:

1) Poor people make up most of the rail passengers, and they don't care how fast the trains go.

2) China is too big a country for rail to compete with air travel when it comes to rich travelers.

3) Planners assumed land value would increase infinitely. Thus they built tracks in sparsely populated and deserted areas, like between Lanzhou and Xinjiang.

4) Many tracks provide overlapping service. Between Beijing and Shanghai, for instance, there are currently three high-speed rail lines and one regular track.

5) China spent illogical amounts to maximize speed.

6) HSR train stations tend to be located far away from city centers. This can be blamed on rushed development, incentive to build new stations rather than expand old ones, and optimism about future urban growth.

7) China cut corners on equipment and safety.

Jefferies reiterated an underperform rating on many Chinese rail companies. Looking beyond rail, the bank declares that China's infrastructure boom has peaked. By now the government seems to have realized that changing its growth model is more important than GDP.